<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
--------------------------------------------------
[X] Quarterly report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
For the transition period from
to
-------- --------
----------------------------------------
Commission file number 0-7616
I.R.S. Employer Identification Number 23-1739078
Avatar Holdings Inc.
(a Delaware Corporation)
255 Alhambra Circle
Coral Gables, Florida 33134
(305) 442-7000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 9,170,102 shares of the
Company's common stock ($1.00 par value) were outstanding as of October 31,
1998.
1
<PAGE> 2
AVATAR HOLDINGS INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Unaudited):
Consolidated Balance Sheets --
September 30, 1998 and December 31, 1997............................................... 3
Consolidated Statements of Operations --
Nine months and three months ended
September 30, 1998 and 1997............................................................ 4
Consolidated Statements of Cash Flows --
Nine months ended September 30, 1998 and 1997.......................................... 5
Notes to Consolidated Financial Statements............................................... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................... 13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................................................... 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................ 21
</TABLE>
2
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AVATAR HOLDINGS INC. AND SUBSIDIARIES
Consolidated Balance Sheets - (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Assets
Cash $ 31,567 $ 4,085
Restricted cash 5,620 4,690
Contracts and mortgage notes receivables, net 17,017 24,319
Other receivables, net 7,142 6,186
Land and other inventories 172,590 161,161
Property, plant and equipment, net 190,798 188,602
Other assets 22,438 19,448
Regulatory assets 2,977 3,318
Assets of discontinued operations 31,457 27,559
------------ ------------
Total Assets $ 481,606 $ 439,368
============ ============
Liabilities and Stockholders' Equity
Liabilities
Notes, mortgage notes and other debt:
Corporate $ 130,000 $ 44,506
Notes collateralized by contracts and mortgage notes receivable 10,895 23,566
Real Estate 19,898 39,163
Utilities 37,955 39,216
Estimated development liability for sold land 8,423 8,697
Accounts payable 4,582 6,081
Accrued and other liabilities 42,562 36,918
Deferred customer betterment fees 18,925 18,667
Minority interest in consolidated subsidiaries 5,472 7,268
Liabilities of discontinued operations 21,838 18,662
------------ ------------
Total Liabilities 300,550 242,744
Commitments and contingent liabilities
Contributions in aid of construction 60,892 61,582
Stockholders' Equity
Common Stock, par value $1 per share
Authorized: 15,500,000 shares
Issued: 9,170,102 shares 9,170 9,170
Additional paid-in capital 151,422 151,422
Accumulated deficit (40,428) (25,550)
------------ ------------
Total Stockholders' Equity 120,164 135,042
------------ ------------
Total Liabilities and Stockholders' Equity $ 481,606 $ 439,368
============ ============
</TABLE>
See notes to consolidated financial statements
3
<PAGE> 4
AVATAR HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Nine and Three Months Ended September 30, 1998 and 1997
(Unaudited)
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
Nine Months Three Months
1998 1997 1998 1997
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Revenues
Real estate sales $ 64,888 $ 60,284 $ 18,867 $ 17,535
Deferred gross profit 3,347 3,010 1,067 935
Utility revenues 27,088 26,153 8,765 8,242
Interest income 4,339 4,110 1,270 1,188
Trading account profit, net -- 257 -- 50
Other 392 601 128 217
--------- --------- -------- --------
Total revenues 100,054 94,415 30,097 28,167
Expenses
Real estate expenses 69,881 66,308 22,430 20,955
Utility expenses 20,453 19,207 6,806 6,315
General and administrative expenses 7,540 6,919 2,398 2,141
Interest expense 12,275 8,743 3,960 3,558
Other 397 518 123 163
--------- --------- -------- --------
Total expenses 110,546 101,695 35,717 33,132
--------- --------- -------- --------
Loss from continuing
operations before income taxes (10,492) (7,280) (5,620) (4,965)
Discontinued operations:
(Loss) income from operations, less
income tax expense of $0
(78) 699 63 (48)
Estimated loss on disposal, less
income tax expense of $0 (2,000) - - -
--------- --------- -------- --------
Loss before extraordinary item (12,570) (6,581) (5,557) (5,013)
--------- --------- -------- --------
Extraordinary item:
Loss on early extinguishment of debt,
less income tax expense of $0 (2,308) - - -
--------- --------- -------- --------
Net loss $ (14,878) $ (6,581) $ (5,557) $ (5,013)
========= ========= ======== ========
Basic and Diluted EPS:
Loss from continuing operations $ (1.14) $ (0.80) $ (0.61) $ (0.54)
(Loss) income from discontinued operations $ (0.01) $ 0.08 $ 0.01 $ (0.01)
Estimated loss on disposal $ (0.22) - - -
Loss from extraordinary item $ (0.25) - - -
Net loss $ (1.62) $ (0.72) $ (0.60) $ (0.55)
</TABLE>
See notes to consolidated financial statements
4
<PAGE> 5
AVATAR HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30, 1998 and 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ($ 14,878) ($ 6,581)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 7,820 7,551
Loss on early extinguishment of debt 2,308 -
Estimated loss on disposal of discontinued operations 2,000 -
Deferred gross profit (3,347) (3,010)
Inventory writedown - 200
Cost of homesite sales not requiring cash 1,492 2,061
Trading account profit, net - (257)
Changes in operating assets and liabilities:
Restricted cash (930) (145)
Investments trading - 528
Principal payments on contracts receivable 10,980 13,876
Receivables (331) 289
Other receivables (956) 1,533
Inventories (14,866) (15,600)
Other assets (2,946) 363
Assets/liabilities from discontinued operations, net (2,722) (2,039)
Accounts payable and accrued and other liabilities 4,403 (584)
--------- --------
NET CASH USED IN OPERATING ACTIVITIES (11,973) (1,815)
INVESTING ACTIVITIES
Investment in property, plant and equipment (9,035) (6,654)
--------- --------
NET CASH USED IN INVESTING ACTIVITIES (9,035) (6,654)
FINANCING ACTIVITIES
Proceeds from issuance of 7% Convertible Subordinated Notes 115,000 -
Net proceeds from revolving lines of credit and
long-term borrowings 19,932 46,070
Principal payments on revolving lines of credit and
long-term borrowings (84,642) (38,953)
Redemption of 9% preferred stock of subsidiary (1,800) (1,800)
--------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 48,490 5,317
--------- --------
INCREASE (DECREASE) IN CASH 27,482 (3,152)
Cash at beginning of period 4,085 6,463
--------- --------
CASH AT END OF PERIOD $ 31,567 $ 3,311
========= ========
</TABLE>
5
<PAGE> 6
AVATAR HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited) -- continued
For the Nine Months Ended September 30, 1998 and 1997
(Dollars in thousands)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
Cash paid during the period for: 1998 1997
-------- --------
<S> <C> <C>
Interest - Continuing operations (net of amount
capitalized of $476 and $2,289
in 1998 and 1997, respectively) $ 9,822 $ 6,485
-------- --------
Interest - Discontinued operations (net of amount
capitalized of $109 and $13 in 1998
and 1997, respectively) $ 1,403 $ 811
======== ========
Income taxes $ - $ -
======== ========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Contributions in aid of construction $ 1,617 $ 4,401
======== ========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
AVATAR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN THOUSANDS)
BASIS OF STATEMENT PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated balance sheets as of September 30, 1998 and December
31, 1997 and the related consolidated statements of operations for the nine
month and three month periods ended September 30, 1998 and 1997 and the
consolidated statements of cash flows for the nine month periods ended September
30, 1998 and 1997 have been prepared in accordance with generally accepted
accounting principles for interim financial information, the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statement presentation. In the opinion of
management, all adjustments necessary for a fair presentation of such financial
statements have been included. Such adjustments consisted only of normal
recurring items. Interim results are not necessarily indicative of results for a
full year.
For a complete description of the Company's other accounting policies,
refer to Avatar Holdings Inc.'s 1997 Annual Report on Form 10-K and the notes to
Avatar's consolidated financial statements included therein.
RECLASSIFICATIONS
Certain 1997 financial statement items have been reclassified to
conform to the 1998 presentation.
EARNINGS PER SHARE
Earnings per share is computed based on the weighted average number of
shares outstanding of 9,170,102 for the nine and three months ended September
30, 1998 and 9,095,102 for the nine and three months ended September 30, 1997.
The computation of earnings per share for the nine and three months ended
September 30, 1998 did not assume the conversion of the Notes and employee stock
options, as the effect of both would be antidilutive. There is no difference
between basic and diluted earnings per share for 1998 and 1997.
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. Due to the short
maturity period of the cash equivalents, the carrying amount of these
instruments approximates their fair values. Restricted cash includes deposits of
$5,620 and $4,690 as of September 30, 1998 and December 31, 1997, respectively.
These balances are comprised of housing deposits, that will become available to
the Company when the housing contracts close, and utilities deposits from water
utilities customers.
STOCK OPTIONS
In October 1995, the Financial Accounting Standards Board issued
Statement No. 123, "Accounting for Stock-Based Compensation." Statement No. 123
allows companies to measure compensation cost in connection with employee stock
compensation plans using a fair value
7
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -- continued
STOCK OPTIONS - continued
based method or to use an intrinsic value based method in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25). The Company has elected to follow APB 25 and related
interpretations in accounting for its employee stock options.
USE OF ESTIMATES
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Accordingly, actual results could differ from those
reported.
RELATED - PARTY TRANSACTIONS
During 1997, a subsidiary of the Company entered into a joint venture
and construction management agreement with a subsidiary of Brookman-Fels for the
development of certain parcels at Harbor Islands. In November 1997, the
Company's subsidiary, Avatar Properties Inc., acquired certain assets of
Brookman-Fels and employed, as officers, the three partners. On June 1, 1998,
Avatar paid $1,995 to acquire certain assets from its joint venture partner at
Harbor Islands, and the joint venture and construction management agreements
were modified whereby Avatar's subsidiary will receive a 6% construction
management fee to manage construction at Harbor Islands. The purchase price
approximated the estimated fair value of the acquired assets, therefore, no
goodwill was recorded in conjunction with this transaction.
On June 1, 1998, a newly formed Avatar subsidiary and Brookman-Fels at
Presidential Estates formed a joint venture and entered into a construction
management agreement for Presidential Estates. Avatar's subsidiary will receive
a 6% construction management fee to manage construction at Presidential Estates.
Avatar paid $588 for a 49% interest in the joint venture and a 50% interest in
the profits in the form of a promissory note, bearing interest at an annual rate
of 8%, payable, together with accrued interest, upon the closing of agreed upon
units.
CONTRACTS AND MORTGAGE NOTES RECEIVABLES
Contracts and mortgage notes receivables are summarized as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- -------------
<S> <C> <C>
Contracts and mortgage notes receivable $ 27,976 $ 40,478
------------- -------------
Less:
Market valuation reserve - 43
Deferred gross profit 11,625 15,659
Other (666) 457
------------- -------------
10,959 16,159
------------- -------------
$ 17,017 $ 24,319
============= =============
</TABLE>
8
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - continued
LAND AND OTHER INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- -------------
<S> <C> <C>
Land developed and in process of development $ 92,290 $ 98,407
Land held for future development or sale 32,378 31,552
Dwelling units completed or under construction 47,173 30,334
Other 749 868
------------- -------------
$ 172,590 $ 161,161
============= =============
</TABLE>
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES
Minority interest in consolidated subsidiaries is represented by
preferred stock of Avatar Utilities' subsidiaries. Total preferred stock
outstanding is as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- -------------
<S> <C> <C>
9% Cumulative preferred stock $ 5,400 $ 7,200
Other 72 68
------------- -------------
$ 5,472 $ 7,268
============= =============
</TABLE>
Avatar's utilities subsidiary's 9% cumulative preferred stock issue
provides for redemption of a minimum of $1,800 of the preferred stock per annum
beginning in 1997. During each of the first quarters of 1998 and 1997, Avatar
redeemed $1,800 of the preferred stock. A redemption of all outstanding shares
shall occur no later than March 1, 2001.
Charges to operations included in "Other expenses" relate to preferred
stock dividends of subsidiaries for the nine months ended September 30, 1998 and
1997, which amount to $397 and $518, respectively.
9
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - continued
NOTES, MORTGAGE NOTES AND OTHER DEBT
On February 2, 1998 the Company issued $115,000 principal amount of 7%
Convertible Subordinated Notes due 2005 (the "Notes"). The Notes are convertible
into common stock of Avatar at the option of the holder at any time at or before
maturity, unless previously redeemed, at a conversion price of $31.80 per share.
These Notes are designed to enhance the Company's liquidity resources and to
give it increased operating and financial flexibility. The Notes are
subordinated to all present and future senior indebtedness of Avatar and are
effectively subordinated to all indebtedness and other liabilities of
subsidiaries of Avatar. The net proceeds of $111,550 after deducting expenses
were used to repay $33,000 aggregate amount of 8% Senior Debentures due 2000 and
9% Senior Debentures due 2000. The remaining proceeds will be used to implement
the development of the Company's new active adult communities, to expand its
homebuilding operations, to reduce higher interest rate borrowings, to provide
additional working capital and for other corporate purposes. The early
extinguishment of the 8% and 9% Senior Debentures resulted in an extraordinary
loss of $2,308 pertaining to the unamortized portion of discounts associated
with these debentures.
INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred income tax assets and liabilities as of
September 30, 1998 and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Deferred income tax assets
Net operating loss carryforward $ 24,000 $ 20,000
Tax over book basis of land inventory 32,000 31,000
Unrecoverable land development costs 3,000 3,000
Tax over book basis of depreciable assets 4,000 5,000
Alternative minimum tax and investment tax credit carryforward 4,000 5,000
Other 2,000 2,000
-------- --------
Total deferred income taxes 69,000 66,000
Valuation allowance for deferred income tax assets (55,000) (51,000)
-------- --------
Deferred income tax assets after valuation allowance 14,000 15,000
Deferred income tax liabilities
Book over tax income recognized on homesite sales (1,000) (2,000)
Book over tax income recognized on vacation ownership sales (5,000) (4,000)
Deferred carrying charges on utilities plant (2,000) (2,000)
Other (6,000) (7,000)
-------- --------
Total deferred income tax liabilities (14,000) (15,000)
-------- --------
Net deferred income taxes $ 0 $ 0
======== ========
</TABLE>
10
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - continued
INCOME TAXES - continued
A reconciliation of income tax expense from continuing operations to
the expected income tax expense (credit) at the federal statutory rate of 34%
for the nine months ended September 30, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Income tax expense (credit) computed at statutory rate ($ 3,567) ($ 2,475)
Income tax effect of non-deductible dividends
on preferred stock of subsidiary 135 176
State income tax (credit), net of federal effect (396) (265)
Other, net (172) 564
Change in valuation allowance on deferred tax assets 4,000 2,000
----------- -----------
Provision for income taxes $ 0 $ 0
=========== ===========
</TABLE>
CONTINGENCIES
Avatar is involved in various pending litigation matters primarily
arising in the normal course of its business. Although the outcome of these and
the following matter cannot be determined, management believes that the
resolution of these matters will not have a material effect on Avatar's business
or financial position.
In May 1995, a wastewater rate increase was filed for the North Fort
Myers Division of Florida Cities Water Company (FCWC), a utilities subsidiary of
the Company. In November 1995, the Florida Public Service Commission (FPSC)
issued an Order authorizing a rate increase of approximately 18% (an annualized
revenue increase of approximately $378). Following a challenge to the Order by
the Office of Public Counsel (the customer advocate) and certain customers, FCWC
requested implementation of the rates granted in the Order. After a hearing, the
FPSC issued a new Order in September 1996 authorizing final rates which were
approximately 5% lower than rates in effect prior to the rate increase filing.
FCWC filed an appeal with the District Court of Appeal of Florida, First
District (DCA) and in January 1998, DCA reversed and remanded the September 1996
Order. By Order dated April 14, 1998, the FPSC ordered the record reopened and
scheduled a hearing in December 1998 to take testimony on one issue remanded by
the DCA. FCWC's challenge of this FPSC action was denied by the DCA on June 17,
1998. The rates implemented in January 1996 are reflected in the financial
statements and will remain in effect, subject to refund plus interest, pending
the ultimate outcome of this matter. FCWC believes that there is a reasonable
basis it will prevail.
11
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -- continued
DISCONTINUED OPERATIONS
During 1997, the Company developed a formal plan for the disposition of
its timeshare business. During the second quarter of 1998, the Company entered
into a non-binding letter of intent with an unaffiliated third party for the
sale of the timeshare operation; however, negotiations were discontinued during
the third quarter of 1998. Management is currently in discussion with various
parties to market the sale of this operation. In the second quarter of 1998 the
Company revised its estimate of the net realizable value of the discontinued
timeshare operations based on then current business conditions and potential
market price for the timeshare operations. As a result, an estimated loss on the
disposal of the operations amounting to $2,000 was recorded during the second
quarter of 1998. Net assets and liabilities of the timeshare business have been
segregated from the continuing operations in the accompanying balance sheets,
and operating results are segregated and reported as discontinued operations in
the accompanying consolidated statements of operations and cash flows.
Consolidated operating results relating to the discontinued operations
for the nine and three months ended September 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Nine Months Three Months
-------------------------- -----------------------
1998 1997 1998 1997
-------- ------- ------ -------
<S> <C> <C> <C> <C>
Revenues
Real estate sales $ 12,624 $ 9,827 $7,214 $ 3,412
Interest income 1,831 1,228 657 479
Other 1,039 284 548 43
-------- ------- ------ -------
Total revenues 15,494 11,339 8,419 3,934
Expenses
Real estate expenses 13,764 9,476 7,590 3,516
Interest expense 1,808 1,164 766 466
-------- ------- ------ -------
Total expenses 15,572 10,640 8,356 3,982
-------- ------- ------ -------
Net (loss) income from discontinued operations $ (78) $ 699 $ 63 $ (48)
======== ======= ====== =======
</TABLE>
12
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -- continued
DISCONTINUED OPERATIONS - CONTINUED
The net assets and liabilities of the discontinued operations included
in the accompanying consolidated balance sheets as of September 30, 1998 and
December 31, 1997 is as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 79 $ 49
Restricted cash 453 322
Contracts and mortgage notes receivables, net 21,195 15,197
Other receivables, net 610 691
Land and other inventories 8,609 8,903
Property, plant and equipment, net 255 238
Other assets 2,256 2,159
Reserve on estimated loss on disposal (2,000) -
------------- ------------
Total Assets $ 31,457 $ 27,559
============= ============
Liabilities
Notes, mortgage notes and other debt:
Notes, collateralized by contracts and mortgage
notes receivable $ 14,759 $ 12,952
Real estate 6,447 4,568
Accounts payable 54 694
Accrued and other liabilities 578 448
------------- ------------
Total Liabilities $ 21,838 $ 18,662
============= ============
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
RESULTS OF OPERATIONS
The following discussion of the Company's financial condition and
results of operations should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere in this Form 10-Q.
Operations for the nine and three month periods ended September 30,
1998 resulted in a net loss of $14,878 or $1.62 per share and $5,557 or $0.60
per share, respectively, compared to a net loss of $6,581 or $0.72 per share and
$5,013 or $0.55 per share, respectively, for the same periods of 1997. The
decrease in operating results for the nine and three months ended September 30,
1998 was primarily attributable to an increase in interest expense and general
and administrative expenditures. Also contributing to the decrease in operating
results for the nine months ended September 30, 1998 was a decrease in utilities
operating results, a decrease in the discontinued vacation ownership operations,
an estimated loss on the disposal of discontinued operations as well as an
extraordinary loss on the early extinguishment of debt as compared to the same
period in 1997. The decrease in operations for the nine months ended September
30, 1998 was partially offset by an improvement in real estate operating results
compared to the same period in 1997.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) -- CONTINUED
RESULTS OF OPERATIONS - CONTINUED
Avatar's real estate revenues for the nine and three months ended
September 30, 1998 increased $4,604 or 7.6% and $1,332 or 7.6%, respectively,
while real estate expenses increased $3,573 or 5.4% and $1,475 or 7.0%,
respectively, when compared to the same periods of 1997. The increase in real
estate revenues for the nine months ended September 30, 1998 is generally a
result of increased housing revenues partially offset by a decrease in
commercial and industrial land sales. The increase in real estate revenues for
the three months ended September 30, 1998 is attributable to an increase in
commercial and industrial land sales partially offset by decreased housing
revenues when compared to the same period of 1997. The increase in real estate
expenses for the nine months ended September 30, 1998, when compared to the same
period of 1997, is essentially a result of related costs associated with the
increased sales volume. The increase in real estate expenses for the three
months ended September 30, 1998 is primarily due to increased selling expenses
associated with the increased homebuilding sales volume as well as nonrecurring
expenditures associated with product development at the Company's Poinciana
project.
Data from homebuilding operations for the nine and three months ended
September 30, 1998 and 1997 is summarized as follows:
<TABLE>
<CAPTION>
Nine Months Three Months
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Units closed
Number of units 336 316 104 102
Aggregate dollar volume $45,958 $41,411 $13,156 $13,543
Average price per unit $ 137 $ 131 $ 127 $ 133
Units sold, net
Number of units 413 472 146 133
Aggregate dollar volume $81,033 $60,586 $29,818 $16,682
Average price per unit $ 196 $ 128 $ 204 $ 125
</TABLE>
<TABLE>
<CAPTION>
September 30
1998 1997
------- -------
<S> <C> <C>
Backlog
Number of units 453 462
Aggregate dollar volume $92,118 $60,524
Average price per unit $ 203 $ 131
</TABLE>
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) -- CONTINUED
RESULTS OF OPERATIONS - CONTINUED
Data from the national and international retail land sales programs,
terminated in the second quarter of 1996, is as follows:
<TABLE>
<CAPTION>
September 30
1998 1997
-------- --------
<S> <C> <C>
Retail Land Sales Operations Data
Deferred gross profit $ 3,347 $ 3,010
Interest income 2,448 4,110
Loss on contract cancellations (43) (872)
Contract servicing expense (426) (437)
Interest expense (1,043) (2,173)
Balance Sheet Data
Contracts and mortgage notes receivable, net 17,017 27,080
Debt collateralized by contracts and mortgages receivable 10,895 26,766
</TABLE>
Contract servicing expense and loss on contract cancellations are included
under the caption real estate expenses on the consolidated statement of
operations.
Utilities revenues for the nine and three months ended September 30,
1998, increased $935 or 3.6% and $523 or 6.3%, respectively, when compared to
the same periods in 1997. The increase in utilities revenues for the nine and
three months ended September 30, 1998, is primarily attributable to customer
growth and increased contract services. Utilities expenses for the nine and
three months ended September 30, 1998, increased $1,246 or 6.5% and $491 or
7.8%, respectively, when compared to the same periods of 1997. The increase in
utilities expenses for the nine and three months ended September 30, 1998, is
primarily attributable to increases in maintenance and other operational
expenses.
General and administrative expenses for the nine and three months ended
September 30, 1998 increased by $621 or 9.0% and $257 or 12.0%, respectively,
compared to the same periods in 1997. The increase is primarily attributed to
increased executive compensation and professional fees.
Interest expense for the nine and three months ended September 30, 1998
increased $3,532 or 40.4% and $402 or 11.3%, respectively, compared to the same
periods in 1997. The increase is primarily attributable to the interest expense
incurred from the Notes (described below) issued February 2, 1998. Also
contributing to the increase in interest expense is the reduction of $1,813 in
capitalized interest in 1998 compared to 1997.
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) -- CONTINUED
RESULTS OF OPERATIONS - CONTINUED
For the nine months ended September 30, 1998 operating results from
discontinued vacation ownership operations decreased due to changes in the
product mix as compared to the same period in 1997. In addition, the Company
revised the estimate of the net realizable value of the discontinued timeshare
operations based on current business conditions. As a result, an estimated loss
on the disposal of the operations amounting to $2,000 was recorded during the
second quarter of 1998.
For the nine months ended September 30, 1998, the Company recorded a
$2,308 extraordinary loss due to the early extinguishment of the $33,000
aggregate amount of 8% and 9% Senior Debentures due 2000. The extraordinary loss
resulted from the unamortized portion of the discounts associated with the
$33,000 aggregate amount of 8% and 9% Senior Debentures due 2000 written off
upon extinguishment.
LIQUIDITY AND CAPITAL RESOURCES
Management implemented a new real estate business strategy in 1997 to
capitalize on the Company's distinct competitive advantages and emphasize higher
profit margin businesses. Under its new strategy, the Company intends to
concentrate on development and management of active adult and other planned
communities, construction of custom and semi-custom homes, and development and
acquisition of commercial and industrial properties. The Company does not
anticipate that its new real estate business strategy will achieve or sustain
profitability or positive cash flow until the year 2000 or later. The Company's
primary business activities are capital intensive in nature. Significant capital
resources are required to finance homebuilding construction in process,
infrastructure for roads, water and wastewater utilities, selling expenses and
working capital needs, including funding of debt service requirements, operating
deficits and the carrying cost of land. The Company expects to fund its
operations and capital requirements through a combination of cash, operating
cash flows, proceeds from the sale of certain non-core assets and external
borrowings. There is no assurance that the sale of certain non-core assets will
be achieved.
On February 2, 1998 the Company issued $115,000 principal amount of 7%
Convertible Subordinated Notes due 2005 (the "Notes"). The Notes are convertible
into common stock of Avatar at the option of the holder at any time at or before
maturity, unless previously redeemed, at a conversion price of $31.80 per share.
These Notes are designed to enhance the Company's liquidity resources and to
give it increased operating and financial flexibility. The Notes are
subordinated to all present and future senior indebtedness of Avatar and are
effectively subordinated to all indebtedness and other liabilities of
subsidiaries of Avatar. The net proceeds of $111,550 after deducting expenses
were used to repay, on March 13, 1998, $33,000 aggregate amount of 8% Senior
Debentures due 2000 and 9% Senior Debentures due 2000. The remaining proceeds
are available to implement the development of the Company's new active adult
communities, to expand its homebuilding operations, to reduce higher interest
rate borrowings, to provide additional working capital and for other corporate
purposes.
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) -- CONTINUED
LIQUIDITY AND CAPITAL RESOURCES - CONTINUED
For the nine months ended September 30, 1998, net cash used in
operating activities amounted to $11,973 as a result of an increase in
inventories, which included expenditures from land development and housing
operations of $14,866 and an increase in other assets of $2,946, partially
offset by principal payments collected on contract receivables of $10,980. Net
cash used in investing activities of $9,035 resulted primarily from investments
in property, plant and equipment. Net cash provided by financing activities of
$48,490 resulted primarily from proceeds of $115,000 from the Notes after
repayment of $33,000 of the 8% and 9% Senior Debentures due 2000 and $51,642 in
land, construction and development loans.
For the nine months ended September 30, 1997, net cash used in
operating activities amounted to $1,815 as a result of an increase in
inventories, which included expenditures from land development and housing
operations of $15,600, partially offset by principal payments collected on
contract receivables of $13,876. Net cash used in investing activities of $6,654
resulted primarily from investments in property, plant and equipment. Net cash
provided by financing activities of $5,317 resulted primarily from net proceeds
from revolving lines of credit and long-term borrowings of $46,070 less
principal payments on revolving lines of credit and long-term borrowings of
$38,953.
At September 30, 1998, the Company's secured real estate lines of
credit, exclusive of timeshare credit facilities, amounted to $10,895, all of
which were fully utilized. These real estate lines are secured by contracts and
mortgage receivables aggregating $11,973 and are due to mature in the second
quarter of 1999. Corporate secured lines of credit were $20,000 at September 30,
1998, the unused and available portions were $5,000, and mature in the second
quarter of 1999.
At September 30, 1998, utilities unsecured lines of credit were $15,000
and the unused and available portion was $14,133. The utilities lines mature in
the second quarter of 2000.
YEAR 2000
The Year 2000 issue relates to computer systems programmed to use two
digits rather than four to define the applicable year. Computer systems and
other programmable devices utilizing time/date-sensitive software and hardware
may recognize a date using "00" as the year 1900 rather than the Year 2000 which
could result in the computer or device shutting down, performing incorrect
computations or performing inconsistently.
Various systems could be affected, ranging from complex information
technology (IT) computer systems and applications which may be impacted by the
Year 2000 issue and the actions related to non-IT systems and equipment which
include embedded technology which may be impacted by the Year 2000 problem and
the actions related thereto. In addition, the failure to be Year 2000 compliant
by third party vendors and suppliers with whom a company has material
relationships could adversely affect such company.
17
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) -- CONTINUED
YEAR 2000 - CONTINUED
The Company's systems that integrate all major aspects of the Company's
business, including inventory control, planning, labor utilization and financial
reporting, were designed in the early 1990's and are substantially Year 2000
compliant. Since 1997, the Company has been continually assessing the ability of
the information system to handle the "Year 2000 Issue", and currently does not
expect this issue to be material to the Company's business based upon its
assessment of its own system.
State of Readiness
The Company has conducted a comprehensive review of its computer
systems to identify those systems that could be affected by the Year 2000 issue
and has developed an implementation plan to resolve the issue. The
implementation plan includes the following phases: formation of a team of
internal resources to inventory affected technology and assess the impact of the
Year 2000 issue; develop solution plans; modify or replace existing processes,
hardware and software; test and certify modified, existing and new processes;
and develop contingency plans. All components of software and hardware of the
Company are currently in various phases of review, modification or
implementation.
As of September 30, 1998 all critical hardware and software systems
utilized by the Company have been tested and/or verified as either Year 2000
compliant or appropriate remediation was taken or will be taken to effect
compliance. Certain non-critical software systems were determined not to be Year
2000 compliant and have been or will be modified or converted to compliant
systems. Systems utilized by the Company's utilities subsidiaries were not
compliant, and during the 1997 fiscal year financial systems were converted to
compliant systems previously in use by the Company. Conversion of additional
non-critical systems is in process. Meter reading devices used by the Company's
utilities subsidiaries include certain embedded systems which may fail; however,
such failure would be immaterial as billing for utilities services can be
estimated based on historical usage pending necessary remediation or
replacement. Testing systems utilized to verify compliance include the posting
to the systems of the date of January 1, 2000 as though the date were effective.
The Company expects to have all critical IT and non-IT systems tested by
December 31, 1998. Any necessary additional modifications or replacements will
be completed during the first quarter of 1999 and offsite testing of critical
systems will be conducted in the second quarter of 1999 in conjunction with the
Company's standard testing of its business recovery program.
The Company also developed a third-party vendor and business partner
awareness program, which communicates matters of concern to the Company
pertaining to the Year 2000 issue. A comprehensive Year 2000 questionnaire has
been circulated to material third-party vendors and business partners to enable
the Company to ascertain their status of Year 2000 readiness and/or compliance.
The Company's questionnaire was prepared and circulated as of September 17, 1998
to more than 300 parties. There can be no assurance that systems of third
parties on which the Company relies will be converted in a timely manner, or
that a failure to properly convert by another company would not have a material
adverse effect on the Company. However, the Company will review the materiality
of third-party vendors and business partners who report
18
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) -- CONTINUED
YEAR 2000 - CONTINUED
failure to be compliant or who do not respond to the Company's questionnaire
with a view toward locating appropriate alternate parties where applicable and
possible.
Cost of addressing Year 2000
The Company is well underway with its implementation plan to address
Year 2000 issues and anticipates completion during the second quarter of 1999.
During the past few years nominal expenditures were effected to upgrade and/or
replace certain software, which expenditures were not directly related to Year
2000 issues but to general improvements to the systems. Total expenditures
related to the Year 2000 project are estimated not to exceed $200 with $50
related to equipment and $150 to software. All costs associated with the
Company's Year 2000 effort have come from, or are expected to come from, cash
flow from operations or borrowings.
Because it was not necessary to replace the Company's midrange computer
and/or its major operating systems, nominal expenditures to date are estimated
to approximate $50. It is not possible to determine absolute expenditures
because appropriate modifications to software applications systems were made
from time to time as potential issues were discovered. Costs associated
therewith were not specifically designated and for the most part represented
installation of equipment and conversion and/or modification of systems
performed by employees of the Company.
The estimated cost of the Company's Year 2000 project and the dates on
which the Company believes it will complete such efforts are based on
management's best estimates, which were derived using numerous assumptions
regarding future events, including the number of man-hours to program and/or
install equipment and software, as well as response to the Company's
questionnaire regarding vendor readiness. The Company does not separately track
internal costs related to the Year 2000 issue. Such costs are principally the
related payroll costs for the Company's Business Information Systems personnel.
The Company's estimated total expenditures related to the Year 2000 of $200
represents less than 5% of the Company's aggregate IT budgets for 1997, 1998 and
1999. There can be no assurance that these estimates will prove to be accurate.
Specific factors that could cause material differences with actual results
include, but are not limited to, the results of testing and the timeliness and
effectiveness of remediation efforts of third parties.
The Company believes its systems have been adequately and appropriately
reviewed and tested, and minor modifications and/or conversions have been or
will be effected as necessary.
Risk Presented by Year 2000 Issues
A failure by the Company to resolve a material Year 2000 issue could
result in the interruption in, or failure of, certain normal business activities
or operations and could materially and adversely affect the Company's financial
condition, results of operations and cash flows.
19
<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) -- CONTINUED
YEAR 2000 - CONTINUED
The Company is currently assessing those scenarios in which unexpected
failures could have a material adverse effect on the Company and will attempt to
develop contingency plans designed to deal with such scenarios. In general, the
Company could continue basic real estate operations in the event of failure of
its computer systems. The Company's utilities operations are highly regulated
and the operating systems were designed with manual overrides to operate the
physical plants in the event of failure of automated systems.
Based on current plans and assumptions, the Company does not expect
that the Year 2000 issue will have a material adverse impact on the Company as a
whole. Due to the general uncertainty inherent in the Year 2000 issue, however,
there can be no assurance that all Year 2000 issues will be foreseen and
corrected on a timely basis, or that no material disruption to the Company's
business operations will occur. Further, the Company's expectations are based on
the assumption that there will be no general failure of external local, national
or international systems (including power, communications, postal,
transportation, or financial systems) necessary for the ordinary conduct of
business.
Contingency Plan
The Company is in the process of developing a contingency plan designed
to address reasonably likely Year 2000 scenarios, and this plan is currently
expected to be completed by the beginning of the 1999 second quarter. In the
normal course of business, the Company maintains contingency plans designed to
address various other potential interruptions. These preexisting contingency
plans are being incorporated into the Year 2000 contingency plan and are
expected to assist in mitigating any adverse effect due to interruption of
support provided by third parties resulting from their failure to be Year 2000
compliant. There can be no assurance, however, that successful contingency plans
to address the Year 2000 issue can, in fact, be developed or implemented or that
certain development and implementation would be economically feasible.
FORWARD-LOOKING STATEMENTS
Certain of the matters discussed under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere in this Form 10-Q constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other important factors that could cause the actual results, performance or
achievements of the Company, or industry results, to differ materially from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Such risks, uncertainties and other important
factors include, among others: the successful implementation of the Company's
new business strategy; shifts in demographic trends affecting active adult
communities and other real estate development; the level of immigration and
in-migration to the Company's regional market areas; national and local economic
conditions and events, including employment levels, interest rates, consumer
confidence, the availability of mortgage financing and demand for new and
existing housing; the Company's access to future
20
<PAGE> 21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) -- CONTINUED
FORWARD-LOOKING STATEMENTS - CONTINUED
financing; competition; changes in, or the failure or inability to comply with,
government regulations; the ability of the Company and third parties to address
Year 2000 issues adequately; and such other factors as are described in greater
detail in the Company's filings with the Securities and Exchange Commission,
including its Annual Report on Form 10-K for the fiscal year ended December 31,
1997.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information, which is set forth in the paragraph under the caption
"Contingencies" in the Notes to Consolidated Financial Statements (Unaudited) in
Item 1 of Part I of this report, is incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
27 Financial Data Schedule (for SEC use only)
REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended September 30,
1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AVATAR HOLDINGS INC.
Date: November 13, 1998 By: /s/ Charles L. McNairy
----------------- -----------------------------------
Charles L. McNairy
Executive Vice President, Treasurer
and Chief Financial Officer
Date: November 13, 1998 By: /s/ Michael P. Rama
----------------- -----------------------------------
Michael P. Rama
Chief Accounting Officer
21
<PAGE> 22
Exhibit Index
27 Financial Data Schedule (for SEC use only)
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF AVATAR HOLDINGS, INC. FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1998
<CASH> 37,187
<SECURITIES> 0
<RECEIVABLES> 27,976
<ALLOWANCES> (10,959)
<INVENTORY> 172,590
<CURRENT-ASSETS> 0<F1>
<PP&E> 190,798
<DEPRECIATION> 0
<TOTAL-ASSETS> 481,606
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 198,748
0
0
<COMMON> 9,170
<OTHER-SE> 120,164
<TOTAL-LIABILITY-AND-EQUITY> 481,606
<SALES> 91,976
<TOTAL-REVENUES> 100,054
<CGS> 90,334
<TOTAL-COSTS> 110,546
<OTHER-EXPENSES> 7,937
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,275
<INCOME-PRETAX> (10,492)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,492)
<DISCONTINUED> (2,078)
<EXTRAORDINARY> (2,308)
<CHANGES> 0
<NET-INCOME> (14,878)
<EPS-PRIMARY> (1.62)
<EPS-DILUTED> (1.62)
<FN>
<F1>NOTE: Total Current Assets and Total Current Liabilities are not applicable
because Registrant does not present a classified balance sheet.
</FN>
</TABLE>
